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A Critique of Haber’s Study Claiming That PAEs Are Beneficial

Professor Stephen Haber of Stanford recently came out with a paper that, according to him, “suggests in new research that concerns about too much litigation involving patents is misguided.”

We believe that the results of our experiment may have two important implications for understanding whether PAEs help or hinder the rate of innovation. First, PAEs may serve an intermediary role in the market for intellectual property between individual inventors and large manufacturers. Second, in the absence of PAEs, individual inventors might play a more limited role in the innovation ecosystem.

Unfortunately, Haber’s research has neither implication.

The survey that Haber created was intended to get at the following question:

Why do individuals choose to assign their patents to PAEs rather than license their technologies directly to manufacturers or assert them through litigation? For every patent that PAEs buy, there must be a willing seller. This simple fact implies that PAEs must perform some function in clearing the market for invention.

There is, of course, a simple answer to Haber’s question: the PAEs are the ones buying because no one else wants them. Haber has endorsed the idea that large companies want to be able to avoid paying for using other people’s inventions, so it’s not surprising that he wouldn’t come up with that answer.

A brief digression: opponents of patent reform frequently say that large companies support reform because they want the freedom to infringe valid patents. Supporters of reform argue that most of the patents used by PAEs are junk, and no one wants to be held up using the threat of patent litigation.

The PTAB has been invalidating most of the patents being challenged using inter partes review and covered business method review, which would seem to support the “PAE patents are junk” argument. Opponents of patent reform, however, say that this proves that the PTAB is anti-patent and therefore we should change the rules to protect patent owners from these “patent death squads.” (This is the reasoning behind the STRONG Act.)

There is a clear bias here, and it shows up in Haber’s methodology.

Haber conducted a survey of people who went through incubators and accelerators at Stanford and the University of California at Berkeley. 112 people took the web survey.

The approach is a pretty standard one in behavioral economics (pioneered by Daniel Kahneman and Amos Tversky): give people hypothetical choices to measure their preferences for risk. In this case, the survey gave people a hypothetical choice between 1) selling a patent worth $1 million to a PAE for $100,000, and 2) filing a lawsuit themselves. For one group, the legal fees were $1000 an hour and had no limit. For the other group, the legal fees were paid on contingency and amounted to a third of the recovery.

A little over half of the first group said they’d sell to a PAE and 4 out of 10 in the second group said they’d sell.

Here’s how the question was worded to the first group:

A large corporation called Technology Titans saw your idea and has decided to infringe your patent without paying for it.

You now have two options:

Sell your patent to a firm called Ideas Incorporated for a guaranteed $100,000, and Ideas Incorporated will now deal with Technology Titans directly.

Hire a lawyer to defend your patent against Technology Titans in an attempt to secure your $1 million. The lawyer charges $1,000 an hour and there is no limit to the number of hours billed for this case.

What would you like to do?

There are a lot of problems with this question.

First of all, the wording is incredibly biased. The alleged infringer is called “Technology Titans” which invokes a David versus Goliath image. Technology Titans also deliberately infringed the patent in the scenario, which makes them a real bad actor. (As I’ve written before, there’s no evidence that this happens more than a few times a year out of the thousands of patent cases filed.)

The choice is hardly fair. At $1,000 an hour, your $1 million gets eaten up in legal fees with 1,000 hours of work, which is only a few months (at most) on a typical patent litigation. As a former patent litigator, I’ve never heard of a patent litigator charging $1,000 an hour, and if you were looking for a lawyer to recover $1 million, you’d hardly be looking at $1,000 an hour lawyers. The way the question is worded, you could easily spend way more in legal fees than you recovered even if you won.

Despite that, nearly half the people preferred hiring the lawyer with unlimited fees over selling for $100,000 to a PAE. That’s higher than I would have expected.

We can speculate as to why so many people chose not to sell to “Ideas Incorporated.” Maybe they don’t like patent trolls. Maybe they didn’t like the idea of someone else making the $1 million, so much so that they’d rather have nothing. Maybe they believe that it doesn’t take that many hours to litigate a patent case.

The survey doesn’t tell us. We know little to nothing about the responders’ backgrounds. For example, how many had any experience with litigation? Have any responders sued or been sued on a patent?

The big problem though is that we don’t know how robust the preference is: Haber didn’t try different costs and different spreads between the options. Kahneman and Tversky found that the amounts involved do matter, and it matters if they’re phrased as a gain or a loss. Haber used one set of numbers, and they seem to be set up to produce the result he expected to see (i.e., that individuals have a good reason to sell to patent assertion entities).

We have no idea how responders felt about their choices. Perhaps they didn’t like the idea of selling to a PAE, but felt trapped by the scenario. Haber could have done something as simple as asking the responder to rate on a scale of 1 to 10 how they felt about their choice.

And we don’t know what the responders believed would happen in the lawsuit. They might believe that lawsuits never work, or that they’d get so little money it wouldn’t be worth it. Again, you can have them rank on a scale of 1 to 10 what they think the likelihood of winning the patent suit is and how much they would expect to recover in a lawsuit. That way we’d have some idea why they answered the way they did.

The way the study was done, we don’t have enough information to answer the original question, which was why people sell their patents to PAEs. It was a good question, but we’re still waiting for any kind of an answer.